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Squeezed

Blog-Squeezed

Why is it that every time I am out with customers I end up with something new to blog about? Probably because I am insanely curious about each customer as I look to creatively help them to improve their manufacturing processes in their specific business context.

Meet our customer: A highly engineered automotive manufacturing parts supplier

Our customer is a high mix manufacturer, a Tier 1 supplier in the automotive manufacturing industry. While some Tier 1 suppliers are extremely large companies in their own right, this company is actually pretty small. They supply highly engineered products specific to particular OEM brands and models.

Their automotive customers sent all their high volume work off-shore, which leaves our poor client scrambling to do more production runs, with lower volume and a wider range of products.

Low Volume, high mix, no forecast visibility

Many of our customers handle low volume, high mix manufacturing processes. What’s challenging here is that their customers aren’t doing a good job of forecasting. (Surprise, surprise!)  In this case, customer forecasts and firm orders are changing substantially from week to week – often within our customer’s purchasing lead and sometimes within our customer’s contractual lead time.  In effect, they are being taken advantage of by their much larger customers.

What’s a little guy to do?

Their goal was to reduce lead time as much as possible by  developing a highly responsive supply chain to adapt to all these last-minute changes. They decided they could become world-class at new product introductions and rapid changeovers. Easy, right? Problem solved?   Not so fast!

To get the lowest unit price, they had to rely on large, off-shore suppliers. While the pricing is great, there are a number of downsides.

  1. The large suppliers produce at scale, and require full container orders.
  2. Off-shore means long, sometimes unpredictable, lead times.
  3. In many cases, they’ve become locked in with these suppliers for a variety of reasons.

As they described their situation, I wrote down one word on my notepad. “SQUEEZED

Squeezed from both directions

They are getting pressure from their customers to meet their ever-changing demand and pressure from their suppliers to abide by their long lead times and larger batch sizes.  Since they are a not-so-big company, they have no leverage in either direction. They inevitably have too much inventory of the wrong things and a supply chain that is slow to respond. This is eating into their profits and causing stress and frustration.

How did this happen?

You can see how they may have gotten there. Originally, they probably made much of their end-product themselves, using commodity level items. Along comes a supplier who can handle some of their manufacturing at a lower unit cost – which sounds like a great deal! So they outsource a portion of their manufacturing to the supplier.

The supplier then gets bought or relocates their own manufacturing overseas, increasing the lead time and minimum order size. Since our customer has already eliminated this part of their own manufacturing capabilities, they are locked in to this supplier.

This situation happens over and over again. I often see production equipment idled and collecting dust because that work has been outsourced.

What should they do now?

Since they can’t turn back the clock, the only way forward is to get through it. Here are some ideas.

  1. Start enforcing contractual lead times. Customers are notoriously difficult to manage, but they need to start taking a stand for what’s acceptable and what they can deliver.
  2. Start re-shoring their supply chain as much as possible, potentially even bringing some of the work back in house.
  3. Re-establish vertical integration. Increase use of commodity-level components and reduce dependence on sole suppliers.
  4. Understand the financial and risk tradeoffs of local vs. remote suppliers.

Understanding the tradeoffs of local vs. offshore suppliers

Traditional landed cost considers only duty and transportation in addition to unit cost. The reality is that manufacturers need to factor in other costs and risks to understand the impact of off-shore sourcing. These include:

  1. Carrying cost of inventory due to large inventory levels required
  2. Storage cost
  3. Risk of inventory obsolescence
  4. Risk of inventory shrinkage
  5. Expediting costs for emergency situations
  6. Demand volatility
  7. Demand risk

I worked with one company with a target for a certain level of inventory turns and broke down the turns by country of origin and then projected turns based on shifting the country of origin.  This gave them some strategic targets to march towards.

If you are “squeezed” it’s time to think outside the vice.

Written By: Phil Coy

Phil 300

CFO Microsoft Dynamics AX